Rachel Reeves must show that she’s serious about boosting growth

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Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.

The writer is a former chancellor of the exchequer

When I was chancellor, one of the biggest frustrations was the public debate ahead of Budgets. All the media really wanted to talk about was tax and spend, when for me the most important thing was always growth. I had 110 growth measures in my 2022 Autumn Statement, but apart from full expensing, does anyone remember what they are? Growth measures tend to be frustratingly long-term, but the impact of measures on tax and spend is instant.

I fear the same thing is happening again. Labour has a political objective, which is to frame any unpopular tax rises as the fault of their predecessors. But having promised not to put up taxes beyond those specified in their manifesto over 50 times, big tax rises would be seen as a betrayal.

That will no doubt dominate the political debate. But much more critical for the economy is whether the government is willing to take the difficult decisions on growth it has repeatedly promised. Labour inherited the fastest growing economy in the G7 from the last Conservative government. If that is to continue, it will need to take those difficult decisions in three areas in particular. So here are the three growth tests for the Budget.

The first is the employment test. The previous Conservative government created 800 jobs a day and halved unemployment. Yet many employers worry that Angela Rayner’s new workers’ rights package will deter them from offering more jobs. Labour has also cancelled the plans the previous government had to bring down economic inactivity to pre-pandemic levels. That would have been an important source of employees for businesses wanting to expand. It also happens to be the quickest way to reduce the pressure on public finances because the working age benefit bill is set to increase by £90bn by the end of the decade. So will the Budget commit to measures that reduce the number of people claiming sickness benefit by a published number? Conservative plans would have seen 424,000 fewer people claiming some levels of benefits. Will Labour commit to something similar? 

The second growth test is around productivity. Economists agree that the only way to raise living standards sustainably is to increase productivity. Even with its current economic challenges, Germany has 15 per cent higher productivity than the UK. Yet in its first few months in power, the government has announced several measures that, far from increasing productivity, will actually reduce it. Public sector pay rises of over £9.4bn with no strings attached were double or triple inflation. That is despite public sector productivity being 5.9 per cent below pre-pandemic levels. This will now increase — a big mistake because public sector productivity is the one part of our national output over which the government has direct control. Other measures in the government’s “New Deal” for workers are also likely to harm private sector productivity. For many businesses, these plans will either increase labour costs or reduce the output from the workforce they already have.

In the spring Budget, I announced a plan to see around two per cent productivity growth in the NHS as part of a broader plan for the entire public sector. So will Labour’s first Budget commit to a productivity plan with published targets for the public sector? And will the government promise to “do no harm” when it comes to private sector productivity?

The final growth test concerns measures to boost investment, again central to our ability to raise living standards. Given how much investment we are attracting in artificial intelligence, it was surely a mistake to cancel the supercomputer at the University of Edinburgh. Nor is it sending the right signal to try to renege on a deal with AstraZeneca to develop the vaccines manufacturing plant at Speke. But the biggest worry for many businesses is the possibility of rises in capital gains tax and other less visible business taxes. Investment is linked to competitive tax levels, which is why last year the Conservative government introduced some of the most generous capital allowances in the OECD. Will this government therefore commit to avoiding tax rises that damage growth and investment next month?

So far we have seen a lot of politics from Rachel Reeves. But what matters to ordinary families is good jobs and rising living standards — in other words, economic growth. If we see nettles being grasped in welfare reform, productivity and investment then our economy has a chance to continue to grow. But if a summer of politics from the government has simply been laying the ground for a traditional Labour tax and spend budget, no one will be fooled.